SimplyCredit: Keep the credit cards you love, Ditch the terms that suck

Hi Jugad,

Thanks for the constructive comment. I want to first clarify one thing -- we are not 'claiming' we are revolutionizing the industry by switching to simple interest (it is a pretty big deal though for the industry as you will see in my comment below but that's not a claim we are making) . As you pointed out the biggest value prop of our service is convenience (you get to keep your credit cards -- no change in your day-to-day use) and lower rates (our rates will be 3% to 15% lower than credit card companies for comparable risk rating) and really diverting the revenue from the credit card companies so they will be forced to change their ways. I can write pages about all the ways a credit company screws a consumer but that will take us away from your very balanced comment.

All the current approaches rely on giving people cash in the form of personal loans supposedly to pay down credit card debt. I can tell you from working in this industry for so long that this does not really put a dent on the credit card companies. At least, for now those consumers eventually start using their cards again and get trapped in debt because the credit card companies don't want them to pay more than the minimum payment. This is what's unique about what we are doing:

Normal: Consumer Spends $1000 -> Pays less than full balance -> Incurs interest -> Bank gets paid handsomely

Ours: Consumers spends $1000 -> SimplyCredit Pays the bank $1000 -> Consumers incurs interest at a lower rate -> Bank gets nothing -> We get paid what we believe is a fair amount

The above picture eliminates the vital revenue source from the banks. Now why this is better for the consumer:

* We have no fees (no late fees, no penalties). The credit card terms are practically irrelevant.

* We don't re-price you upwards (credit card companies do this all the time and that's how they start low and increase your rates as you start building balances -- CARD only solves a portion of this problem)

* We really encourage people to pay much more tan the minimum payment. Banks fought so hard for minimum payment warning in CARD that it is only marginally useful now. We don't want to be like them and that's not our goal.

Back to your original point about simple interest:

* You are correct, we can probably do better in characterizing the benefit as no one is going to compounded their balances over 4-years without paying down principal. We will try to come up with additional examples -- we wanted to keep it simple to illustrate the issue of compounding but point taken.

* The benefit will be meaningful when it look at it over the life of the debt. People paying $2 extra per month means they pay $24 / mth. Over 5+ years period they have paid a good chunk in extra interest just because of compound interest.

* That said, do you disagree with our characterization that this is 'unfair' and 'complicated'? If you ever had to pay interest on your card, please take a look at that statement and see if you can figure out how interest was calculated. Don't just read about the average daily balance and daily rate statements, try to calculate it on a piece of paper.

* I also don't quite agree that this change is 'minuscule'. There are a few things to keep in mind:

* First, department store cards defer interest 6 to 12 months and it is getting compounded away for a really long time. They also charge 25-30% interest. You can repeat the math for that period and interest rate and you can tell me whether that difference is meaningful. You will most likely see a 10-20% difference between compound interest and simple interest. For most people here it $100 more is not a big deal may be but that could be one additional payment for someone else.

* Yes we are making people pay their interest each month but why should we compare against ourselves? Shouldn't be comparing it against what the industry does, which wants things compound away without your realizing it?

* If this is so trivial as you said, why isn't ANYONE doing this? Some people who claim 'simple interest' in their marketing but actually compound. They all do personal loans with EMI. Guess what the standard formula for EMI is a compound interest. Just because you get fixed monthly payments does not make it simple interest.

* To answer my own question above: the industry will not do simple interest any time soon and this is why: A typical bank's gross yield is about 11% and with simple interest they will drop down to roughly 10%. That's a 10% drop in revenue. BUT, their ROA is 3% so a 1% drop in revenue without reducing default rates (switching interest rates formulas will not help here) or opex, their profit drops by 33%. You think a bank will willing take 33% hit to their profit? To you it may sound minuscule but these dollars add to a huge amount. This is in turn used against the very same consumers in the form of heavy lobbying. Is this the world we want?

In summary, I appreciate your calling out on the simple interest page. We certainly not using it as a marketing tool as we are indeed trying to fix a system as I explained to you above -- we are giving up huge sources of revenue (fees and the compound interest delta). But this page is important and we will make it better -- we will try to come up with a typical credit card user payment behavior and show the difference.

I would urge you to look beyond the simple interest delta. To you it is not a big difference but to a lender it is and we are making the sacrifice to keep things simple for the consumer. We are eliminating a whole bunch of crap from the terms that trip up consumers along the way.

I wish we are ready to signup 1000s today but alas integration with banking system requires a measured roll out. We will release more and more information over time to show how this is really different for a consumer. If you have additional suggestions, please send it our way. you can guess my email easily.

Thanks for reading this far.